THERE was much talk at Davos, the global elite’s annual get-together in Switzerland, of wealth inequality: the gap between the haves and the have-nots. The corporate-bond market is currently displaying a similar divide—between the have-yields and the yield-nots.
According to Bank of America Merrill Lynch (BAML), around €65 billion ($71 billion) of European corporate bonds are trading on negative yields; in other words, investors lose money by holding them. Yet the rates paid by issuers of low-quality or junk bonds have been soaring.
The spread (the interest premium over government borrowing rates) paid by junk-bond issuers has risen by nearly three-and-a-half percentage points since March last year (see chart). The gap is now nearly as great as it was during the euro crisis of 2011, although it is less than half as wide as it was after Lehman Brothers collapsed in 2008.
Odd though it may seem, these market movements are part of the same trend. As January’s stockmarket wobbles have shown, investors are very nervous and are looking for safety. Certain corporate-bond issuers, such as Nestlé, a Swiss foods group,…Continue reading